QBE INSURANCE GROUP Citi conference - 25 October 2011 Presented by: Neil Drabsch, Group CFO
Frequently asked questions Insurance/reinsurance pricing and market conditions Acquisitions and growth - QBE business model QBE s global reinsurance arrangements - cost of reinsurance Quality of QBE s investment portfolio Eurozone fears QBE FY 2011 outlook Dividend sustainability 2
Overall premium rate increases on renewed business expected to exceed 4% for FY11 Pricing outlook: US small accounts lead upturn in premium rates Source: Council of Insurance Agents & Brokers 3rd quarter update: QBE the Americas overall average rate increase of around 3%, with an upward trend European operations up 2% overall with encouraging rate increases across motor and catastrophe-exposed property portfolios Australian operations showing rate increases across most portfolios, average 5% Reinsurance rates for catastrophe-exposed business up in all markets 3
Lloyd s major losses Net ultimate claims (1998 2011). 2011 is costliest first half on record Major claims for 1H 2011 double the level of the prior year and more than 10 times long-term average 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50-9/11 KRW Hurricanes Full Year First Half For the period 2004 2010, QBE s large risk and catastrophe claims average was 8.1% of NEP QBE s FY2011 lower range insurance profit margin guidance of 11% assumes a 13% allowance for large individual risk and catastrophe claims or US$1.95Bn net of reinsurance Source: Lloyd s, Aon Benfield Market Analysis 4
QBE s underwriting performance compared with selected London based insurers results Combined Operating Ratio FY 2007 FY 2008 FY 2009 FY 2010 1H 2011 Amlin 68.3 86.3 75.4 93.6 124.4 Beazley 86.6 81.6 93.6 83.7 106.5 Brit 94.0 90.7 91.1 98.4 104.8 Catlin 85.3 96.5 93.0 93.3 118.4 Hiscox 84.9 79.1 87.0 89.3 118.8 All Lloyd's Syndicates 84.0 91.3 86.1 93.3 113.3 Aviva 101.1 104.6 102.4 98.0 98.9 RSA 100.5 97.1 98.8 96.7 98.5 QBE Europe 84.8 85.6 91.3 90.5 95.4 QBE Group 85.9 88.5 89.6 89.7 95.7 Source: Published accounts and company websites for insurance & reinsurance business. The CORs are expressed as a % of NEP. 5
QBE s diverse and specialised businesses assist in outperforming global peers in difficult market conditions Top 30 of the top 50 major global insurers that have reported to date: Eureko PICC PingAn QBE 91.9 92.5 92.8 95.7 COR% 97.4 98.1 93.1 89.7 IAG Berkshire Hathaway Hannover Re Suncorp 104.3 107.8 108.8 109.4 COR% 1H2011 FY2010 1H2011 FY2010 Progressive 91.8 92.4 Hartford 103.7 95.1 100.2 Sampo 92.5 93.6 Hartford 103.7 95.1 Chubb 96.4 91.7 Liberty Mutual 109.5 102.7 Mapfre 96.5 95.9 Chartis 111.3 116.8 Ace 97.0 90.0 AIG 111.3 116.8 AXA 97.3 99.2 SCOR 113.5 101.0 RSA 98.5 96.7 CNA Financial 117.5 119.8 Aviva 98.9 98.0 Allstate 117.6 99.9 Allianz 99.0 98.2 Swiss Re 118.1 94.2 Generali 99.2 102.2 Munich Re 125.1 100.8 Zurich 100.9 98.9 Everest Re 125.5 102.7 Information sourced from published accounts and company websites for insurance and reinsurance business The CORs include all identifiable expenses related to insurance activities and the COR is expressed as a % of NEP 92.2 97.1 98.6 6
QBE business model: growth by acquisition Acquisitions in 2010 and 2011 all met our strict criteria including EPS accretion in year one 2010 acquisitions Cost US$M Additional annualised GWP US$M NAU Country US multi peril crop insurer 573 900 CNA Argentina workers compensation insurer 66 135 Secura NV Belgian based specialist reinsurer 443 250 Renaissance Re US multi peril crop insurer 270 560 Colonial Companie de Seguros (Ecuador), Seattle Specialty (US) & RGM Agency (Colombia & Ecuador) 2011 acquisitions (to date) 77 140 Balboa US lender-placed / voluntary insurance 708 1,650 CUNA Australian mutual insurer 22 90 Total 2,159 3,725 Total acquisitions 2007-2011 6,800 7,500 7
QBE business model: growth by acquisition 20.0 Acquisitions to date have locked in premium growth of approximately 15% p.a. over 2011 and 2012 GWP NEP 18.0 Premium - $ bn 16.0 14.0 12.0 10.0 8.0 6.0 Compound annual average premium growth rates since 2001 - gross written premium 17.5% - net earned premium 20% 4.0 2.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (forecast) 8
2011 global reinsurance program: lower reinsurance cost and reduced maximum event retention Over the past five years QBE has increased GWP by 123% and significantly increased the diversity of its businesses, both by product and geography, enabling the Group to reduce its overall risk profile and leverage reinsurance economies through greater scale reinsurance expense ratio to GEP 20.0% 17.4% maximum event retention to NEP 15.0% 13.7% 13.7% 15.4% 13.5% Target (1) 12.00% 10.0% 5.0% 3.5% 3.8% 4.3% 4.0% 3.8% 3.8% 0.0% 31 Dec 2007 31 Dec 2008 31 Dec 2009 31 Dec 2010 30 Jun 2011 31 Dec 2011 (1) 12% target reinsurance expense ratio for FY11 excludes reinstatement premiums 9
QBE s global reinsurance program 70% of cost locked in to growth for 2012/2013 QBE s reinsurers have earned overall underwriting profits since 2000 QBE s reinsurers benefit from greater diversity and lower risk profile Supports QBE s ability to secure more comprehensive cover at lower cost Notes: 1. IAG & Suncorp results are for the full year ended 30 June 2. QBE, RSA and Amlin include half year results for 2011 3. All premium and recovery amounts are in original currency 4. All information sourced from company websites and published accounts 10
Investment strategy: maintain a cautious approach and invest in high quality liquid securities Market value of investment portfolio Currency mix 30 June 2011 US$29.0Bn % 31 Dec 2010 US$25.3Bn % No investments in banks that failed the European stress test and no holdings of sovereign debt issued by the European peripheral countries Australian dollar US dollar 34 33 35 33 Low interest yield environment and spread volatility is expected to continue Sterling Euro Other 16 9 8 100 15 9 8 100 Our investment strategy will continue to focus on locking in higher spreads and yields on quality credits Equities will be held up to around 2.5% of the total portfolio (currently net 0.4%) and actively managed to maximise return 11
2011 HY insurance margin analysis: strong underlying margin of 16% Reported margin adjusted for: 20.0 19.0 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 11.2 Reported 1H insurance profit margin (2.2) Operational FX gains (1) 6.9 Large individual risk & catastrophe claims above 9% allow ance (2) (0.8) Unrealised gains on FI securities (3) 0.6 Changes in risk free rates (4) 0.3 Further reinsurance savings (5) 16.0 15.0 Underlying 1H insurance profit margin (1) Operational FX gains, assumed nonrecurring (2) Abnormal large claims events above expected prudent allowances of 9% (3) Market value movement on FI securities (4) Movement in risk free rates impact 3.22% to 3.15% (5) Reinsurance savings from worldwide reinsurance programs 12
Outlook for remainder of 2011 Outlook for 2011 FY remains unchanged, noting key variables such as: - large risk losses and catastrophes - risk free rates used to discount outstanding claims - investment yields, particularly credit spreads on corporate bonds The minimum projected insurance profit margin of 11% for 2011 includes: - allowance of 13% of NEP for FY11 net large individual risk and catastrophe claims being US$1,950M - allowance assumes net large individual risk and catastrophe claims allowance of US$870M for 2H or US$1,020M pre the additional aggregate protection (compared with US$590M in 2H10) - risk free rates for discounting claims of around 2.6% (30 June 2011 3.15%) - gross investment yield of 2.7% for FY11 assumes a 25bps increase in credit spreads compared with 31 December 2010 - a 25bps credit spread movement equates to approximately US$88M on our corporate bond portfolio 13
Outlook for remainder of 2011 The underlying insurance margin of 16% is sustainable assuming normal levels of catastrophes losses, stable risk free rates and credit spreads Dividend sustainability supported by: - confidence in underlying insurance margin and profitability - substantial excess regulatory capital - recently affirmed financial strength ratings for our main insurance businesses 14
Important disclaimer The information in this presentation provides an update on market conditions affecting QBE. This presentation should be read in conjunction with all information which QBE has lodged with the Australian Securities Exchange ( ASX ). Copies of those lodgements are available from either the ASX website www.asx. com.au or QBE s website www.qbe.com. Prior to making a decision in relation to QBE s securities, products or services, investors, potential investors and customers must undertake their own due diligence as to the merits and risks associated with that decision, which includes obtaining independent financial, legal and tax advice on their personal circumstances. This presentation may contain statements which constitute forward-looking statements for the purposes of the U.S. Private Securities Litigation Reform Act of 1995. We caution investors or potential investors that such forward-looking statements involve significant uncertainties, both general and specific, and risks exist that the forward looking statements will not be achieved as they involve future events, many of which are beyond QBE s control. QBE s actual performance may differ. Any forward-looking statements assume large individual risk and catastrophe claims do not exceed the substantial allowance in our business plans; no overall reduction in premium rates; no significant fall in equity markets and interest rates; no major movement in budgeted foreign exchange rates; no material change to key inflation and economic growth forecasts; full recoveries from our strong reinsurance panel; and no substantial change in regulation, rating agency criteria or court decisions. 15
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